FXCM Is Buying RefcoFX - Deal is Done - Funds are safe

Quote from jimrockford:

2cents,

What exactly do you think these spot FX firms are doing with their omnibus customer funds? How much risk do you think they are taking, by loaning or investing those funds? Do you think you, as customer, will be compensated for those risks? Isn't it heads they win, tails you lose, so that they have every incentive to pursue hi-risk (for you) investments, yielding hi-return (for them)? You are looking at broker financial statements, but do you get to see the financials of the parties with whom the brokers park customer funds?

Do you think there is any legitimate reason for a retail spot FX broker to keep funds, currently in use as margin, separately and less safely than funds not currently in use as margin? Doesn't the whole scheme of sweeping funds between two accounts increase the costs to the broker? Aren't they offering this scheme, despite its higher costs, because it allows them to perpetuate their scheme of exposing your funds to risk, while pocketing the rewards for themselves? Is there any other reason for sweeping funds?

Do you think that perhaps this whole FX trading thing is a carrot dangled in front of your face, to distract you from the fact that you are financing ultra-risky investments without compensation? Could perhaps junk bonds be a better investment than your FX trading, because at least then you are compensated for your credit risks, and you can also diversify those risks?
More...
hi jim - legitimate concerns but please lets not paint everything with a "Refco Inc" brush... i am not saying there are no risks, nor that the risk of fraud, default is not there of course, but... most of those fx brokers take very little risk, they make more than enough money from customers blowing up, sadly enough (at the same time, if i am going to make any money...)... yes i have access to the financials of the banks they are using, natwest & wachovia, also don't forget rbs is providing them prime brokerage services, i have talked to the rbs guys, they wld have run a number of (credit etc) checks on them prior to agreeing to that (similar to what my former IBk would have done in a similar situation) etc... sweeping costs? between 2 wachovia or natwest paired accts once a week? not much honestly.

also, one of the reasons they want custie funds on the omnibus acct (and won't want to implement "cust name" designated accts / escrow type agreements) is they need to deposit those monies with their prime brokers / liquidity providers as margin... now one risk small brokers take for instance is, often times they get 3-5% margin only from their 'prime'/liquidity providers, while they offer 1% or less to their customers... but thats a reasonably manageable risk, ahem, in most instances... :-)

anyway, all this to say that yes, there are definitely more risks involved in trading via retail spot fx brokers than via the CME (eFX futures) and there will always be... but there are some benefits as well - see http://www.elitetrader.com/vb/showt...37&perpage=6&highlight=incubator&pagenumber=1 for instance... its a trade-off... now thats not to say that we can't make the spot fx mkt safer... imho its been getting safer and safer everyday over the last 5-10 years. cheers ;-)
 
Quote from tomcole:

2cent- Thanks for posting. Interesting indeed.

I think the issue of "costs" related to sweeping funds into some sort of seg a/c is a red herring. I just doint see it as an issue if they have 11,000 accounts. It just requires a push of a button to move funds, its not like someone is carrying a satchel of cash in a cab across town.

I dont really have any idea of how big/small the segment of the FX mkt is you're dealing in, meaning the ultra-high leverage crowd, but I wonder if another way to quantify the risk is to ask a speciality insurer or credit swap dealer if they'd consider and at what cost a credit option would cost. If the cost is 5% of your funds on deposit, is that too high? I dont know.

Also, I wonder if your counter-party has ever done a credit risk elasticity review of what their customers do. eg, if a cust is trading at some level, and what is the liklihood of a default or your margin money not being enough. Years ago, when I worked for a large IB, we did a study and found of the customers who traded, we would have only called for additional margin 5 or 6 times in a 10 year period and even then it was for small amount.
The very top credit/ trading gurus were all shocked by the results. Even when they introduced what they thought were ominous criteria, the results didnt really change drastically. Thats why I dont think sweeping funds into a seg ac is a big deal.
More...
tomcole - agree cost of sweeping funds is a non-issue, they are making it difficult on purpose, and i do find it annoying... not every broker is like that, e.g. IB says they sweep the funds from non-seg to seg daily... at the same time, i can't get the same leverage, no max order size etc type of T&Cs with IB...

re client credit risk, honestly even with 'high' leverage it is quite 'low' if one sticks to trading major fx pairs only... consider that even at 1-0.25% (100x-400x) brokers, most people wld still only invest up to 20% of their available margin equity at any given time (i.e. they are using 20x, or 5% margin)... simplifying a bit, an adverse move of 100 pips on an XXXYYY pair wld only diminish their trading equity by 20% x YYYXXX rate (on 100,000 units type standard contracts)... but u can see those moves coming... now i am not advocating doing this but just for the sake of argument, say i decide to use 200x for a high prob GBPUSD scalp (for say 10-300 seconds) using yr fx broker instant fills no slippage no requote wysiwyg etc quotes, VERY risky of course, but say i hit the wrong button, the mkt gaps 20 pips against me before i can correct, it hurts of course, but i am still down only what, 40% x USDGBP = 23.2% at today's rates... liveable... next time, guaranteed i'll make sure i hit the right button instead :-) , maybe use a little less lev just in case... but in any case, my broker isn't too worried, he may even have auto-liquidated me before i lose that much, its 'easier' than one thinks with today's systems...

as for credit wrappers, i am only aware of them being used by the brokers, not so much the clients, but yes, that would be interesting! i wldn't mind being charged 4-5% p.a. for more leverage honestly :-) have you come across any cases?
 
I've only seen credit options used on big chuncks on accounts, $50mm+

I see your point though, the broker is basically using one set of customers to cover another on risks of blowing up. They must make a ton of money, but I agree with you, their risk is probably quantifianly less than you would expect from what they do.

Its seems like a good business, good margins, and very misunderstood by big banks.
 
definitely a great biz... u may remember my earlier post about my mates who started an fx online brokerage firm about 3 yrs ago... i wld never have opened an acct with a 2-person no-name firm but hey, so what, they've got in excess of 3,000 clients now, most small but some pretty big ($xxmio accts)... doing 5-10yards a month... f*****g unbelievable...
 
Quote from 2cents:

hi jim - legitimate concerns but please lets not paint everything with a "Refco Inc" brush... i am not saying there are no risks, nor that the risk of fraud, default is not there of course, but... most of those fx brokers take very little risk, they make more than enough money from customers blowing up, sadly enough (at the same time, if i am going to make any money...)... yes i have access to the financials of the banks they are using, natwest & wachovia, also don't forget rbs is providing them prime brokerage services, i have talked to the rbs guys, they wld have run a number of (credit etc) checks on them prior to agreeing to that (similar to what my former IBk would have done in a similar situation) etc... sweeping costs? between 2 wachovia or natwest paired accts once a week? not much honestly.

also, one of the reasons they want custie funds on the omnibus acct (and won't want to implement "cust name" designated accts / escrow type agreements) is they need to deposit those monies with their prime brokers / liquidity providers as margin... now one risk small brokers take for instance is, often times they get 3-5% margin only from their 'prime'/liquidity providers, while they offer 1% or less to their customers... but thats a reasonably manageable risk, ahem, in most instances... :-)

anyway, all this to say that yes, there are definitely more risks involved in trading via retail spot fx brokers than via the CME (eFX futures) and there will always be... but there are some benefits as well - see http://www.elitetrader.com/vb/showt...37&perpage=6&highlight=incubator&pagenumber=1 for instance... its a trade-off... now thats not to say that we can't make the spot fx mkt safer... imho its been getting safer and safer everyday over the last 5-10 years. cheers ;-)
More...

OK, well, it sounds like you are going in with your eyes open. Hope my questions didn't convey an underestimate of you, sorry if they did. Good luck!
 
Quote from uninvited_guest:

I wonder how the FXCM/RefcoFX deal is going? Hopefully we will know by January 2006.

No news for a long time.
More...

There is a hearing this Friday to determine the auction date. Other than that no news.

Trader/God
 
Quote from Trader/God:

There is a hearing this Friday to determine the auction date. Other than that no news.

Trader/God
More...

I thought we were waiting for the judge to determine who owns the funds in the RefcoFX accounts? The account holders or refco creditors.
 
Quote from uninvited_guest:

I thought we were waiting for the judge to determine who owns the funds in the RefcoFX accounts? The account holders or refco creditors.
More...

According to FXCM's press release the money they are paying for RefcoFX is going to be used to fund the customer accounts. So if this transaction goes through it won't matter (at least as far as the customers are concerned) they will get their funds regardless.

The deal has been proposed with the accounts transferred to FXCM on completion. The next step in the process is to determine the auction date on Friday and after that we will see what happens.

Trader/God
 
You must log in or register to reply here.
Back
Top